WASHINGTON, Oct. 2 /PRNewswire-USNewswire/ -- A new study
(http://www.aba.com/aba/documents/press/regulating_creditcard_fees_interest
_rates92507.pdf) released today by noted economists Jonathan Orszag and
Susan Manning concludes that placing further legislative restrictions on
credit card interest rates and fees is likely to harm the vast majority of
consumers, most of whom manage credit cards successfully. The study,
sponsored by the American Bankers Association, reaches three primary
conclusions:
1. Proposals for price controls on credit cards may help a small
minority of borrowers, but only at the cost of harming the vast majority of
borrowers;
2. Innovation and deregulation have allowed credit card prices to
reflect borrower risk more precisely, which has benefited the vast majority
of borrowers; and
3. Effective alternatives exist to protect consumers from unfair or
deceptive credit card practices without raising costs or limiting credit
access for other borrowers.
Orszag, senior managing director of economic consulting firm
Competition Policy Associates, Inc. (COMPASS), and Manning, a managing
director of COMPASS, point out that during the past 25 years credit cards
have evolved from a limited-use product primarily for high-income
individuals to a financial tool widely relied upon daily by the majority of
American families.
The study provides evidence that innovations in the credit card
industry have benefited cardholders by making credit available to many more
Americans at much lower prices than a generation ago. It also demonstrates
that credit card interest rates and penalty fees reflect the risk of a
borrower's failure to pay.
Orszag and Manning argue that recent proposals to regulate the credit
card industry by imposing caps or other constraints on fees and interest
rates would yield far more harm than benefits -- a concern borne out by
historical and international experience.
"Imposing rate or fee regulations is the functional equivalent of
squeezing a balloon," explained Orszag. "The air--that is, interest rates
and fees--is just shifted from one side of the balloon to the other--that
is, from higher risk card holders to lower risk ones." In addition, Orszag
explained, "Legislative restrictions on the interest rates and fees that
bank issuers can charge would reduce the availability of credit for many
higher-risk and lower-income borrowers. Those borrowers with reduced access
to credit would find it harder to deal with emergencies and might have to
resort to higher-cost forms of borrowing, such as payday lending."
The study argues that such restrictions also would harm the economy
more broadly as a result of consumers' reduced ability to maintain
consumption through periods of income disruptions or borrow against future
earnings.
"A better approach would be to help the minority without harming the
majority through improved disclosure, increased consumer financial
literacy, and consolidated regulatory oversight for unfair or deceptive
practices," explained Orszag. "Any additional regulatory intervention is
particularly unwarranted before the effects are known of the Federal
Reserve Board's recent proposal to improve the effectiveness of credit card
disclosures. The proposed changes are the result of exhaustive and
comprehensive analysis and, more importantly, consumer testing to determine
readability and clarity of disclosures."
In addition to his position at COMPASS, Orszag is a Fellow at the
University of Southern California's Center for Communication Law & Policy.
Previously, Orszag served on President Clinton's National Economic Council
and as the Assistant to the Secretary of Commerce and Director of the
Office of Policy and Strategic Planning. Manning has more than 20 years of
economic consulting experience, including extensive expertise in
competition and regulatory policy analyses.
A copy of the full report, An Economic Assessment of Regulating Credit
Card Fees and Interest Rates, is available on the ABA's Web site at:
http://www.aba.com/aba/documents/press/regulating_creditcard_fees_interest_
rates92507.pdf.